By Charles Phillips and Ray Lane

Oracle Corp. president Charles Phillips addressed PeopleSoft customers at a March 1 meeting of the Quest User Group. Quest was a JD Edwards user group until PeopleSoft acquired JD Edwards in 2003. The group opposes Oracle’s bid to acquire PeopleSoft. Phillips defended Oracle’s takeover bid and tried to reassure users of the benefits. Edited excerpts from that presentation follow:

It makes no sense for any company to pay billions of dollars to acquire another only to alienate its customer base. After all, the most critical constituent in all of this is the customer. That’s why we’re here.

We’re convinced that a stronger combined applications company, joining Oracle and PeopleSoft, is good for competition, good for investors, and good for users.

What’s in it for users? No. 1 is access to high-quality, truly global customer support through Oracle’s customer-support organization. Few companies in the IT sector can approach the breadth of Oracle’s global-support operations, which will be augmented with PeopleSoft support personnel.

Second is more vertical-market functionality. A combination of the two companies’ customer bases will create critical mass in several industries. That justifies increased investments for software enhancements unique to selected verticals.

Third is innovative world-class outsourcing services. Our outsourcing customer base is growing rapidly and, unlike any other software company, we’ve consistently invested in this business, which we consider strategic.

Fourth is access to future software enhancements and features that leverage the collective wisdom of a larger development organization.

And finally, a larger combined organization will have the critical mass to invest and compete against the largest competitors in this market: SAP and Microsoft. It’s good for customers to have a stronger supplier.

We’ve worked hard to try to provide as much clarity as possible about our intentions concerning the PeopleSoft product line. But we’re working with limited information: We don’t have access to PeopleSoft’s current product road map regarding, for example, the JD Edwards portfolio, which could change significantly before we can conclude this transaction. Software products can morph into many derivatives, through decisions to merge, integrate, or substitute products. Some of these are good business decisions; some are not.

It’s clear that this acquisition has not exactly been on the fast track, and it will take more time for us to complete this transaction. So the best I can do is provide our perspective on our strategy and philosophy around this acquisition.

Also, I’d like to remind you that Oracle’s done a similar transaction beforeactually several, but one fairly large one. With the acquisition of Rdb, a database company purchased from Digital Equipment about 10 years ago, we promised to focus on quality and stability, while enhancing features based on customer demand. At the time, Rdb users had the exact same questions about the takeover you’re asking us today. We looked closely at what Rdb customers had to say, working together with their user groups. The bottom line was that we didn’t require customers to upgrade to our products. In fact, even today, we still help thousands of Rdb customers running important applications. And we gained some great people from that acquisition as well. The head of our entire technology-development division came from Rdb. So we think the record speaks for itself.

The bottom line is this: The market for enterprise applications is highly, highly competitive, with larger companies coming into the market and many substitute products and services evolving by the week, almost. And it’s a buyer’s market. You all know that. Customers control the information in this bidding market, along with consultants such as systems integrators and others. They can assure they receive aggressive pricing regardless of the size of the company or organization. Of course, the courts will have to decide on that one.

Given the huge potential and the benefit for customers and shareholders, it becomes obvious that we should continue to pursue this acquisition and play to win. We think that, over time, once we explain the global-support operations plans and how we’re going to invest in our product lines and enhance them, customers will agree. They would rather have a stronger applications provider that can support all these products with global support than not.

An Interview With Ray Lane: The Pros And Cons Of Consolidation

Ray Lane was Oracle’s president from 1996 to 2000, when he left to join venture-capital firm Kleiner Perkins Caufield & Byers. He spoke with Optimize associate editor Anne Donker about consolidation in the software industry, and the pros and cons of Oracle’s proposed takeover of PeopleSoft.

Q: What’s your opinion of consolidation in the software industry?

A: In every industry, there has to be some consolidation to bring an industry at large down to a rational number of competitors. And in an industry big enough to support it, that number is less than five. The software industry is no different. When I joined Oracle in 1992, we supported the Oracle database on 82 different platforms. That meant we needed 800 engineers just to port the database to different platforms. Today, that number is down from 92 to just 10. Choice, of course, is good, but it can get out of control. You could end up with an environment [that looks] like a quilt work, where all the different components aren’t integrated. Users can’t rationalize dealing with 100 different software companies, 50 different hardware companies, etc. On the other hand, a situation where an industry gets down to too few competitors could be detrimental for users as well.

Q: Why?

A: Ultimately, customers care about price control. If you get too few competitors, the players will try to maintain high prices, which is ultimately detrimental to customers. That’s what happened when IBM was a monopoly. Its products were great, but its prices weren’t. So the customers ultimately asked themselves: Sure, IBM works great, but am I willing to pay for that? And their conclusion was a definite no.

Q: Do you think Oracle’s bid for PeopleSoft would create a comparable situation?

A: Right now, SAP is the dominant ERP company with more than twice the share of its two main competitors, Oracle and PeopleSoft. By acquiring PeopleSoft, Oracle would be the clear No. 2 player in the application space. With $9.4 billion and one stroke of the pen, Oracle would completely change the business-applications market.

Q: How do you think that would impact users?

A: If Oracle takes over PeopleSoft, I think customers might feel as if their options are being reduced. I just can’t believe they wouldn’t say, “That’s not as good for me as having more competition.” In the end, competition lowers prices and provides expertise and skill levels you can choose from. Lack of competition doesn’t do that.

There have been cases where you could argue that the acquiree needed to go away. For example, when there’s a weak competitor in the market that’s not delivering well and would benefit from a strong financier, consolidation would be a good thing for the customer. Take Digital Equipment: Was it serving customers in the end as well as it could? No. And so, Compaq helped it do that. But PeopleSoft is a different story.

Q: Why?

A: When you look at the ERP systems of SAP, Oracle, and PeopleSoft, you’d be hard-pressed to find any substantial differences. Any user who performs an evaluation of ERP systems will eventually end up with SAP, Oracle, or PeopleSoft, because they all offer the most functionality. In the decision-making process, users tend to look at more than functionality. Soft factors weigh in as well how customers feel about the vendor’s ability to serve, the long-term future of the companyall these play an important role for CIOs.

Q: What about the argument that a merger would present users with a more attractive overall package?

A: Since the dot-com bust, virtually no customer wants to run all applications from one vendor alone. In the late 1990s, everyone thought IT created differential advantages for companies, so everyone wanted best of breed. The 2000s seem to be a period of compromise. CIOs are now more in the mood to mix up their infrastructure environment. They realize that, for example, neither Oracle, nor PeopleSoft, nor SAP is the best solution out there. The bottom line now is: Why go with one vendor? No one wants to tear out everything anymore and put in all SAP or all Oracle.

Q: What about other players in the business-applications market, such as Microsoft?

A: It’s true that Microsoft, for example, has begun to try to eat away at Oracle and PeopleSoft’s market share, but only in the market for small businesses, not large enterprises. It will take years for Microsoft to get up to speed there. There are other software companies that compete with Oracle. Lots of them are small businesses that can’t set standards or move markets.

Q: If the bid succeeds, do you think Oracle could discontinue the PeopleSoft product suite, which, in effect, would force the new customer base to upgrade to Oracle products?

A: That’s the big question. A forced migration would plunge PeopleSoft customers into significant extra costs. On the other hand, when Oracle bought Rdb from Digital Equipment about 10 years ago, it did a great job of retaining Rdb users. So you never know. When you spend billions of dollars acquiring a customer base, it wouldn’t make sense to alienate them.